Online Brokers Reviews

For this report, we found several current and comprehensive reviews from some major financial publications. A review at SmartMoney takes the top spot in our chart as the best comparative evaluation of online brokers. Editors split testing into full-service brokers, premium brokers and discount brokers. We think this strategy makes sense, since brokers tend to cater differently to different investors. Editors rate brokers on their website, products and research tools. Customer service is also factored into the equation. Barron's annual review covers both online brokers and software-based brokers. We also appreciated a large customer-satisfaction survey from J.D. Power and Associates. Editors there surveyed over 5,000 investors, rating brokers on trade execution, cost, customer service and online information. Kiplinger.com compiles an in-depth ranking of 12 different brokers best suited to mutual fund investors.

The aftershocks of problems in the U.S. housing market have begun to be felt in the brokerage industry. After E*Trade absorbed competitors Harrisdirect and BrownCo, investors had new access to bank accounts and home mortgages. SmartMoney rated E*Trade number one in its premium discount broker category, and other reviewers rated E*Trade highly, too. However, E*Trade has hit a rough patch since those reviews were printed. According to The New York Times, E*Trade was struggling in November 2007 as the result of large holdings by its banking unit of complex bonds tied to the American housing market. The trouble came to light when a Citigroup analyst wrote that E*Trade might suffer a run on its bank because of mortgage concerns. E*Trade’s stock fell by more than 50%, but the company has been rescued for the moment by Citadel Investment Group, a hedge fund, who bought E*Trade’s $3 billion portfolio of mortgage-backed securities for $800 million, or about 27¢ on the dollar. Citadel also loaned E*Trade $2.55 billion at 12.5%, and received about 18% of E*Trade’s stock. E*Trade’s CEO was forced to step down. According to The Times, E*Trade’s main job now is to reassure customers that it is a financially secure company and ready to focus on its brokerage business. In November 2007, Merrill Lynch was also rocked by problems with subprime mortgages, and its CEO was forced to resign. Only time will tell if other brokers will become trapped in the complexities of holding mortgage-backed securities.

Consolidation continues to shake up the brokerage industry, but so far, investors haven't suffered. That's because fees are down for some customers, and services are expanding. According to SmartMoney, commissions have fallen about as far as possible; trades now average $7 to $10, compared to an average of about $15 a few years ago. Brokers are now competing to add high-tech enhancements, such as online videos that teach investors how to trade.  ... Continued

Our Consensus Report shows how many times products are top-ranked by reviewers included in our
All The Reviews Reviewed chart.

Interestingly, no online broker finished in the top spot in more than one review, though several are runners up. Barron's gives Thinkorswim the top spot as software-based broker and TD Ameritrade its highest rating for web-based broker. But TD Ameritrade only ranks in the low midrange at J.D. Power and SmartMoney. Kiplinger's gives Muriel Siebert their highest rating for best online broker for mutual funds, though it ranks in the upper midrange as a web-based broker at Barron's and even lower at SmartMoney. SmartMoney top-rates E*Trade (before its current problems) as best premium broker, but it gets low customer satisfaction scores at J.D. Power and ranks in the middle at Barron's. Scottrade ranks number one in customer satisfaction at J.D. Power, and gets a second place score at SmartMoney, but receives a low ranking at Barron's.

For ConsumerSearch Fast Answers, we looked for online brokers that score consistently near the top, and who have thus far managed to avoid fallout from the current crisis involving subprime mortgages.